Monthly Bulletin of Economic Trends: Economic Activity in the Major States

MELBOURNE INSTITUTE Applied Economic & Social Research Monthly Bulletin of Economic Trends: Economic Activity in the Major States January 2018

Monthly Bulletin of Economic Trends January 2018 Released on 25 January 2018 Economic Activity Table 1: Outlook for Australia 1 Actual Forecasts Actual Forecast 2016 2017 2017 2017 2017 2018 2018 2018 Financial Year Dec Mar Jun Sep Dec Mar Jun Sep 2016/17 2017/18 GDP 2.4 1.8 1.9 2.8 2.9 3.2 2.8 2.9 2.0 2.9 (0.9) (0.4) (0.9) (0.6) (0.9) (0.7) (0.5) (0.7) Household Consumption 2.7 2.1 2.4 2.2 2.2 2.4 2.2 2.6 2.4 2.2 (0.9) (0.4) (0.8) (0.1) (0.8) (0.6) (0.6) (0.6) Private Dwellings 7.8-0.3-2.3-2.3-5.2-2.4-2.6-2.3 2.6-3.1 (2.6) (-3.4) (-0.5) (-1.0) (-0.4) (-0.5) (-0.7) (-0.7) New Business Investment -6.2-0.8 1.4 7.5 5.1 2.5 2.5 1.5-4.0 4.4 (1.8) (3.0) (0.5) (2.0) (-0.5) (0.5) (0.5) (1.0) Domestic Final Demand 2.3 2.2 2.4 3.2 2.8 2.8 2.6 2.7 2.1 2.8 (1.0) (0.7) (0.8) (0.6) (0.7) (0.7) (0.6) (0.7) Imports of Goods & Services 3.2 8.7 6.5 7.7 7.1 6.0 7.2 6.8 4.8 7.0 (2.4) (2.7) (0.5) (1.9) (1.8) (1.7) (1.6) (1.5) Exports of Goods & Services 7.8 3.3 5.3 6.4 6.2 10.4 8.7 8.2 5.4 7.9 (2.7) (-1.6) (3.3) (1.9) (2.5) (2.3) (1.7) (1.5) Inflation & Financial Market Underlying inflation 2 1.6 1.8 1.8 1.8 1.9 1.9 1.8 1.9 1.7 1.8 (0.5) (0.5) (0.5) (0.4) (0.5) (0.5) (0.5) (0.5) Headline Inflation 1.5 2.1 1.9 1.8 1.9 2.0 2.4 2.3 1.7 2.0 (0.5) (0.5) (0.2) (0.6) (0.6) (0.6) (0.5) (0.6) 90-day Bill Rate 3 1.8 1.8 1.7 1.7 1.7 1.7 1.7 1.9 Trade Weighted Index 4 64.7 66.1 64.5 66.5 64.7 64.7 64.7 64.7 $A/$US rate (100) 4 0.74 0.76 0.75 0.79 0.77 0.77 0.77 0.77 Labour Market Unemployment Rate 4 5.7 5.8 5.6 5.5 5.4 5.3 5.2 5.2 5.7 5.4 Employment Growth Rate 5 0.9 1.1 1.9 2.6 3.0 3.2 2.6 2.2 1.4 2.8 (0.2) (0.5) (1.0) (0.8) (0.6) (0.7) (0.4) (0.5) Participation Rate 4 64.7 64.7 65.0 65.3 65.4 65.5 65.6 65.5 64.8 65.4 Wage Price Index 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.2 1.9 2.0 (0.5) (0.6) (0.5) (0.5) (0.5) (0.5) (0.6) (0.6) 1: Actual in black and forecasts in blue; values in parentheses are quarterly growth rates. 2: As measured by the Reserve Bank s trimmed mean measure of inflation. 3: Average over last month in quarter. 4: Average of 3-months in the quarter. 5: Calculated from quarterly employment numbers that are averaged over the 3 months in the quarter. Prepared by G.Lim and V. Nguyen, Macroeconomics@MI. Data in this report were finalized on 25/01/2018. 1

NEW SOUTH WALES State Final Demand Consumption Employment Table 2: Forecasts for Major States Monthly Bulletin of Economic Trends January 2018 Actual Forecasts Calendar Year Dec Mar Jun Sep Dec Mar Jun Sep Actual Forecast 2016 2017 2017 2017 2017 2018 2018 2018 2016 2017 4.8 2.9 2.0 2.8 3.0 3.1 3.1 3.0 4.8 2.7 (1.2) (0.1) (0.5) (1.0) (1.4) (0.2) (0.5) (0.9) 3.1 2.3 2.2 2.6 2.8 2.7 2.6 2.6 3.2 2.5 (1.2) (0.4) (0.6) (0.4) (1.4) (0.3) (0.5) (0.4) 0.5 0.3 0.9 1.8 3.1 2.9 2.8 2.6 2.5 1.5 (-0.1) (-0.2) (1.4) (0.8) (1.1) (-0.4) (1.3) (0.6) Unemployment 5.0 5.1 4.7 4.8 4.7 4.8 4.6 4.6 5.1 4.8 VICTORIA State Final Demand Consumption Employment 3.6 4.4 4.3 4.7 4.6 4.5 4.3 4.2 3.8 4.5 (1.0) (1.7) (1.5) (0.4) (1.0) (1.5) (1.3) (0.3) 3.2 3.0 3.3 2.9 3.0 2.9 2.8 2.7 3.5 3.1 (0.9) (0.7) (1.0) (0.2) (1.0) (0.6) (0.9) (0.1) 3.9 3.7 3.8 3.2 2.9 2.9 2.8 2.7 3.3 3.4 (0.9) (0.5) (1.2) (0.6) (0.6) (0.5) (1.1) (0.5) Unemployment 6.0 6.0 6.0 6.1 5.8 5.7 5.6 5.6 5.8 6.0 QUEENSLAND State Final Demand Consumption Employment 3.3 2.7 3.2 2.7 2.6 2.7 2.7 2.8 1.0 2.8 (1.3) (0.2) (1.0) (0.2) (1.2) (0.3) (1.1) (0.3) 2.6 1.9 2.6 1.9 2.1 2.0 2.2 2.2 2.0 2.1 (1.1) (-0.1) (0.9) (-0.0) (1.4) (-0.3) (1.1) (-0.0) -1.1-0.7 1.8 3.7 4.6 4.3 4.1 3.9 0.6 2.4 (-0.2) (0.8) (1.4) (1.7) (0.7) (0.5) (1.3) (1.5) Unemployment 6.0 6.4 6.2 5.9 5.9 6.0 5.7 5.6 6.1 6.1 SOUTH AUSTRALIA State Final Demand Consumption Employment 1.9 4.4 4.0 3.9 3.7 3.7 3.6 3.4 1.5 4.0 (0.2) (2.8) (0.7) (0.2) (-0.1) (2.8) (0.6) (-0.0) 3.0 2.5 2.7 1.4 1.7 2.2 2.4 2.6 2.9 2.1 (0.4) (0.4) (0.9) (-0.3) (0.7) (0.9) (1.1) (-0.1) 1.1 1.7 1.1 1.8 1.4 1.4 1.5 1.6 1.0 1.5 (0.3) (0.7) (-0.1) (0.9) (-0.1) (0.7) (0.0) (1.0) Unemployment 6.7 6.6 6.9 5.9 5.9 5.9 5.8 5.7 6.8 6.3 WESTERN AUSTRALIA State Final Demand Consumption Employment -7.7-6.7-3.3 1.3 1.4 2.0 2.2 2.4-8.1-1.8 (0.4) (-0.4) (0.4) (0.9) (0.5) (0.1) (0.7) (1.1) 1.0 0.2 1.0 0.8 1.4 1.6 1.8 2.1 1.3 0.9 (-0.3) (0.2) (0.7) (0.1) (0.3) (0.4) (0.9) (0.4) -1.8-0.7 1.0 2.6 3.0 2.8 2.8 2.6-1.4 1.5 (0.1) (0.6) (1.3) (0.5) (0.5) (0.5) (1.3) (0.4) Unemployment 6.5 6.2 5.6 5.7 6.1 6.0 5.7 5.6 6.1 5.9 2

Monthly Bulletin of Economic Trends January 2018 State Final Demands: Victoria doing well and Western Australia improving steadily The latest quarterly Australian Bureau of Statistics National Accounts showed that State Final Demands (SFDs) grew in all the five major states in the December quarter: NSW (1.0%), VIC (0.4%), QLD (0.2%), SA (0.2%) and WA (0.9%). Significantly, revised estimates show that WA s SFD grew by 0.4% in the June quarter of 2017, giving WA two consecutive quarters of SFD growth, an outcome not seen since December 2013 (Table 2). In year-ended terms, as at September 2017, SFD for all the major state economies recorded positive growth. The VIC economy again recorded the strongest growth rate (up by 4.7%), followed by the SA economy (up by 3.9%), the NSW economy (up by 2.8%), the QLD economy (up by 2.7%), and the WA economy (up by 1.3%). This is the second time, since December 2012, that the WA economy has recorded a positive year-ended growth. A closer look reveals that public investment in WA has been the key driver of growth, as public and private consumption have remained relatively steady. In year-ended terms, public investment in WA has increased by an average of 7.5 per cent in the last 5 quarters. Meanwhile, WA s private investment grew by 1.9% in the September quarter, after contracting by an average of 26% in the previous 5 quarters. Figure 1: Contributions to year-ended growth in State Final Demands (percentage points) Source: Australian Bureau of Statistics (ABS). 3

Gross Value Added and Industries in NSW and VIC Monthly Bulletin of Economic Trends January 2018 The nation s largest business and financial centres are in Sydney and Melbourne, and the service industry in the two states of NSW and VIC have grown considerably over the past decade. During this time, the construction boom (including dwelling investment) have further supported a wide range of professional services such as in architecture, legal, financial and real estate services. Meanwhile, demand for information technologies have also grown strongly as firms seek to improve efficiency 1. In NSW, the gross added value (GVA) of Rental, hiring and real estate services has grown the most in the past 10 years, up by 67.7% from 2007, followed by Professional, scientific and technical services (up by 58.8%) and Arts and recreational services (up by 58.0%). The NSW services sector 2 has grown from contributing 34% to NSW GSP in 2000 to contributing 39% in 2017 (Figure 2). In VIC, Professional, scientific and technical services GVA has increased the most, by 59.4%, since 2007, followed by Health care and social assistance (up by 54.9%), and Information media and telecommunications (up by 41.5%). The VIC services sector contributed 37% to VIC GSP in2017 (up from 31% in 2000) (Figure 2). Much of the activity in the service sectors of NSW and VIC has overwhelmingly stemmed from domestic demand. However, exports of services have also increased gradually in recent years and could well be the avenue for future growth in NSW and VIC. Figure 2: GVA Contributions to the State Economy by Key Industries (%) Source: Australian Bureau of Statistics (ABS). 1 For more information about Gross State Products and Gross Added Values by Industry, see: http://www.abs.gov.au/ausstats/abs@.nsf/detailspage/5220.02016-17?opendocument 2 Including: Information media and telecommunications, Financial and insurance services, Rental, hiring and real estate services, Professional, scientific and technical services, Administrative and support services, Health care and social assistance, Arts and recreation services, and Other services. 4

Infrastructure investment to drive growth in WA Monthly Bulletin of Economic Trends January 2018 Turning to WA - the weakest economy among major states, infrastructure spending will likely be the key driver of growth and central to the recovery of economic activity in the coming years. In 2017, key Infrastructure projects such as Northlink WA Stages 1 to 3 (with a total contract value of $780m), have no doubt boosted activity in WA and improved labour market conditions. Between October 2016 and July 2017, around 40,000 jobs were added, and the unemployment rate dipped to 5.4% in July 2017 from a high of 6.7% in November 2016 (Figure 3). However, the WA unemployment rate, rose from 5.4% in July 2017 to around 6.6% in November 2017 because participation rate rose by 1.2 percentage points between July and November 2017. A net of 28,100 workers have entered the WA labour force and about a third have found jobs (Figure 3). The current WA infrastructure package, agreed between the Federal and State governments after the 2017 Federal Budget, is set to give the WA economy a $2.3 billion boost to activity (Federal contribution of $1.6 billion and a State contribution of $0.745 billion). Many of the projects in the WA infrastructure package have started and many more will be rolled out in 2018-2019 (including big projects such as Armadale Road - Dual Carriage Way, Murdoch Drive, Leach Highway and Armadale Road to Northlake Road Bridge with a rough total of around $650 millions) 3. Undoubtedly, these will help sustain economic activity and employment in WA in the coming years. Figure 3: Improvement in WA Labour Market Conditions Source: Australian Bureau of Statistics (ABS). 3 For more details about WA infrastructure packages, see: https://www.mediastatements.wa.gov.au/pages/mcgowan/2017/05/joint-media-statement-2-point-3-billion-dollarsjobs-and-infrastructure-boost-for-western-australia.aspx https://www.mainroads.wa.gov.au/documents/infrastructure%20delivery%20plan%20-%20november%202017%20- %20Web%20Rev1.RCN-D17%5E23978841.PDF 5

Monthly Bulletin of Economic Trends January 2018 State Leading Indexes of Activity: Activity in QLD likely to be just below trend According to the Melbourne Institute State Leading Indexes, activity in NSW, VIC and SA will likely be around trend growth in the first half of 2018 but activity in QLD will likely be just below trend growth. Activity in WA is likely to improve towards trend growth in the coming quarters. Table 1 shows the contributions of key drivers of growth in December 2017. The contributions of retail trade and motor vehicle sales to growth in the State Leading Indexes indicate relatively weak private consumption in the major states. This is consistent with weak current family financial conditions noted in the latest Westpac-MI Consumer Sentiment Survey. High housing debt, together with low wage growth, has put downward pressure on family finances and hence consumer spending is unlikely to improve substantially anytime soon. Information from dwelling approvals points to a cooling in housing construction activity in NSW in the next year or two (considering the lag in this sector s activity) and in VIC a bit further down the track. Construction activity, both residential and non-residential building, has been a key driver of economic activity in these two major states. Table 1: Contributions of Component to Year-end Growth in State Leading Indexes December-2017 NSW VIC QLD SA WA Year-ended growth in the Index 0.27 0.71-0.35 0.22-0.50 Westpac-MI CSI expectations index 0.02 0.05 0.06 0.10 0.02 Westpac-MI UE index 0.04 0.06 0.08 0.08 0.09 Aggregate monthly hours worked 0.43 0.23 0.45 0.09 0.15 Retail trade -0.31-0.23-0.75-0.15-0.58 Dwelling approvals 0.03 0.26-0.02 0.17-0.08 Housing finance commitment 0.09 0.30-0.09-0.19-0.23 Motor vehicle sales -0.10-0.02-0.01 0.05 0.18 AUD/USD 0.10 0.10-0.13 0.12-0.11 Yield spread -0.04-0.04 0.10-0.05 0.09 RBA commodity prices AUD -0.04-0.03 Forecasts for Key Macroeconomic Variables in Major States We forecast growth in the NSW SFD to improve slightly to around 3% in the coming quarters while growth in the VIC SFD is likely to moderate to just above 4.0%. Employment growth in these two major states will be around 2.8% in the coming quarters. As for the SA economy, after recent strong recovery (year-ended SFD growth averaged 4.1% in the last 3 quarters), the SA SFD is likely to slow to around 3.4%. We project that SA year-ended employment growth will likely be around 1.5% over the next 3 quarters and SA unemployment rate will gradually decrease to 5.7% in September 2018. Of the two mining states, the QLD SFD will stabilise at a growth rate of around 2.7% over the next several quarters while growth in the WA SFD continues to rise gradually to around 2.4% in September 2018. Employment growth in these two states is likely to moderate a touch in 2018 after a surge in late 2017 when year-ended employment growth reached 4.6 per cent in QLD and 3.0% in WA in December 2017. We forecast employment growth in QLD to slow to 3.9% in September 2018 and employment growth in WA to slow to around 2.6%. 6

Monthly Bulletin of Economic Trends January 2018 Figure 4: Consumer Sentiment Indexes and State Leading Indexes of Economic Activity Note: The figure plots the 3-month centered moving averages of the Westpac-Melbourne Institute Consumer Sentiment Indexes and the 3-month centered moving averages of the year-end deviation-from-trend growth of the Leading Indexes for NSW, VIC, QLD, SA and WA. Source: Melbourne Institute. The State Leading Indexes combine the latest information from consumer expectations on future activity and unemployment, aggregate monthly hours work, retail trade, dwelling approvals, housing finance commitments, motor vehicle sales, AUD/USD exchange rate, the yield spread and RBA s $A commodity price index (for QLD and WA only). Source: Australian Bureau of Statistics (ABS), Melbourne Institute of Applied Economic and Social Research, Reserve Bank of Australia. 7

Monthly Bulletin of Economic Trends January 2018 Table 4: Precision of year-ended Forecasts for Australia and Major States Precision of (year-end) Forecasts 2017 2018 2018 2018 Dec Mar Jun Sep Australia Economic Activity GDP 0.6 0.9 1.1 1.2 Consumption 0.5 0.8 1.0 1.1 Dwelling 2.3 2.4 2.5 2.8 Business Investment 5.2 6.0 6.7 7.5 Import 2.5 4.2 5.8 6.6 Export 2.6 3.4 4.0 4.4 Inflation & Financial Market Underlying Inflation 0.1 0.2 0.3 0.4 Headline Inflation 0.3 0.4 0.5 0.7 90 day bill 0.3 0.5 0.7 Trade Weighted Index 3.3 3.7 3.9 Labour Market Unemployment Rate 0.1 0.2 0.3 Employment 0.2 0.4 0.5 Participation Rate 0.2 0.3 0.4 Wage Price Index 0.4 0.5 0.6 0.7 Financial Year 2017/18 0.7 0.7 1.9 4.6 3.7 2.9 0.3 0.6 0.6 2.3 0.3 0.5 0.3 0.4 NEW SOUTH WALES Precision of year-ended Forecasts Dec-2017 Mar-2018 Jun-2018 Sep-2018 2017 State Final Demand 1.2 1.4 1.5 1.6 1.2 Consumption 0.9 1.0 1.1 1.1 0.9 Employment 0.7 0.9 1.0 0.8 Unemployment 0.3 0.4 0.4 0.3 VICTORIA State Final Demand 1.3 1.5 1.6 1.6 1.3 Consumption 1.0 1.2 1.3 1.3 1.0 Employment 0.6 0.9 1.0 0.8 Unemployment 0.3 0.4 0.5 0.4 QUEENSLAND State Final Demand 2.1 2.5 2.8 2.9 2.1 Consumption 1.0 1.5 1.7 1.7 1.0 Employment 0.8 1.1 1.2 0.9 Unemployment 0.4 0.5 0.5 0.4 SOUTH AUSTRALIA State Final Demand 1.8 2.0 1.9 2.0 1.8 Consumption 0.9 1.1 1.3 1.3 0.9 Employment 0.8 1.1 1.1 1.0 Unemployment 0.4 0.5 0.6 0.5 WESTERN AUSTRALIA State Final Demand 3.5 3.9 4.1 4.1 3.5 Consumption 1.2 1.6 1.7 1.7 1.2 Employment 0.8 1.1 1.3 1.0 Unemployment 0.4 0.5 0.6 0.5 8

Monthly Bulletin of Economic Trends January 2018 For more information about the Melbourne Institute, see: http://melbourneinstitute.unimelb.edu.au/ For more information about Macro@MI and other Reports see: http://melbourneinstitute.unimelb.edu.au/research-programs/macroeconomics 9